The best financial advisors tell us how important it is to have a diversified portfolio. Unfortunately, that didn't help stock or bond investors much in 2008! Generally, only investors who invested in short-term Treasury instruments, certificates of deposit, and money-market instruments avoided significant losses.

Currently, we are looking at an impasse in Congress over raising the debt-ceiling limit. Some say if there is no agreement by the beginning of August, we are facing a catastrophe in the financial markets. Others say it will be a non-event. I don't know who is right, but I believe that it is important, in order to avoid risks, to understand the available options. Even if we survive the debt-ceiling problem without a significant drop in the financial markets, what will happen to the markets in the event of a terrorist attack?

What options are available for investors who cannot survive on the puny returns from conservative investments but who also do not want to take significant market risks, remembering what happened to their portfolios in 2008?

Conservative investors who maintain a significant percentage of their portfolio in the safest investments -- Treasury Bills, short-term certificates of deposit and money market instruments -- currently obtain returns of less than 1 percent on those instruments. The vast majority of investors cannot continue this strategy on a long-term basis because of inflation. Even if inflation is as low as 3 percent, conservative investors will be losing more than 2 percent a year in purchasing power.

Many readers have written to me indicating they are unwilling to take significant market risk, even though they know that they cannot keep pace with inflation by only investing in the most conservative investment alternatives.

I believe that investors should take some risk on a long-term basis. Otherwise, after years of even relatively low rates of inflation, they will be facing a much lower standard of living in retirement. It is important to be able to structure a portfolio that will provide a reasonable probability of staying ahead of inflation and still protect against significant market drops in both common stock and bond markets. How can this be accomplished?

One way is to look beyond traditional U.S. investments. Some investment advisors and mutual-fund managers spend a great deal of their efforts advising clients to diversify globally and utilize other investment options such as derivatives, stable foreign currencies, and options or futures on commodity indexes, as well as other investments that do not move lockstep with traditional U.S. investments. One mutual fund family, PIMCO, has been very successful with many of their funds because of their expertise in these markets. I have invested successfully for many years in several of PIMCO's funds. One fund that has been very successful for many years is their Total Return D Fund (PTTDX). If you're interested in learning more, I recommend visiting PIMCO's website (www.pimco.com) and reading the insightful comments of William Gross, Mohamed El-Erian and Vineer Bhansali.

Recently, Morningstar Advisor published an article describing Bhansali's philosophy regarding "tail-risk investing." Bhansali defines tail risk is the "risk posed by events that are relatively rare but can have substantial impact on a portfolio." Bhansali, who has a great deal of investment expertise, manages billions of customers' funds in PIMCO's Global Multi-Asset fund (PGAIX) and PIMCO's Real Retirement target-date funds. His philosophy is to guard against "market shocks." He believes "just in time" risk management doesn't work. He believes in a " just in case" philosophy as a long-term insurance policy, and that is how he manages his funds.

For those of you who are very concerned about severe market shocks, as I am, I suggest you look at investment alternatives that can provide you with a reasonable probability of inflation-protected returns, but also give you protection in case of severe market downturns.